Stocks Fall as Crude Oil Surge Complicates the FOMC’s Task

What you need to know…

The S&P 500 Index ($SPX) (SPY) today is down -0.49%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.44%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -0.80%.

Stocks are falling on this morning’s weak U.S. housing starts report and today’s +3.4 bp rise in the 10-year T-note yield.  There is also downward pressure from the possibilities of an expanding UAW strike and a U.S. government shutdown on September 30.  Oil prices rallied to a new 10-1/2 month high today, which boosted oil company stocks but was negative for the inflation outlook and hawkish for Fed policy.

Stocks are trading lower on a cautious note ahead of the 2-day FOMC meeting that begins today.  The markets are fully expecting the FOMC to leave its funds rate target unchanged at 5.25/5.50%.  However, the markets are expecting the FOMC to maintain its hawkish bias and keep in play the possibility of one more rate hike later this year.

Specifically, the markets are discounting a 29% chance that the FOMC will raise the funds rate by +25 bp at the next FOMC meeting that ends on November 1, and a 15% chance for that 25 bp rate hike at the following meeting that ends on December 13.  The markets are then expecting the FOMC to begin cutting rates in 2024 in response to an expected slowdown in the U.S. economy.

October WTI crude oil prices this morning are up +1.39 (+1.52%) at $92.83 per barrel, posting a new 10-1/2 month high on the nearest-futures chart.  Oil prices have rallied sharply in the past two months on a tight supply outlook through year-end after Saudi Arabia and Russia both announced that they will extend their production cuts through year-end. 

The OECD today cut its global GDP forecast for 2024 to +2.7% from +3.0%, with the comment that “While high inflation continues to unwind, the world economy remains in a difficult place.  We’re confronting the double challenges of inflation and low growth.”

U.S. Aug housing starts fell -11.3% to 1.283 million, much weaker than expectations for a decline of about -1%.  However, Aug building permits rose +6.9% m/m to 1.542 million, stronger than expectations for a small decline.

The Eurozone final-Aug CPI was revised slightly lower to +0.5% m/m and +5.2% y/y from the preliminary report of +0.6% m/m and +5.3% y/y.  The final-core CPI was left unrevised at +5.3% y/y.

Overseas stock markets are lower today.  The Euro Stoxx 50 is down -0.17%.  China’s Shanghai Composite Index closed -0.03%.  Japan’s Nikkei 225 today closed down -0.87%.

Today’s stock movers…

The UAW today said that more autoworkers will go on strike at noon on Friday if there isn’t substantial progress on contract talks.  GM (GM) is up +0.3%, Ford (F) is up +0.2%, and Stellantis NV (STLA) is up +2.4%.

Oil stocks are seeing support as WTI crude oil prices today rallied to a new 10-1/2 month high.  Exxon (XOM) is up +0.5%, Chevron (CVX) is up +0.3%, and Conoco Phillips (COP) is unchanged.

Dell Technologies (DELL) is up +0.9% on an upgrade by Daiwa Securities to outperform from neutral on an improved demand outlook.

Starbucks (SBUX) is down -2.4% on a downgrade by TD Cowen to market-perform from outperform due to a “worrisome” outlook for Chinese same-store sales tied to macroeconomic and competitive pressures.

CVS Corp (CVS) is up +1.6% on an upgrade by Evercore ISI due to improving operational issues and an attractive valuation.

Rackspace Technology (RXT) is up +30% on an upgrade by Raymond James to outperform from market-perform on an improved outlook for its turnaround plan.

Rocket Lab USA (RKLB) is down -8% after the company was forced to end its latest rocket launch mission and postponed an upcoming mission.

Royal Caribbean Cruises (RCL) is up by +2.1%, and Carnival (CCL) is up +0.7%, after upgrades by Truist Securities to Buy and Hold, respectively, due to strong trends and more attractive valuations.

Grocery-delivery business Maplebear Inc, doing business as Instacart (CART), will soon begin trading after its IPO was priced on Monday at $30 per share, at the high end of its marketed range. CART raised $660 million of cash at the IPO and had an IPO valuation of $9.9 billion.

Across the markets…

December 10-year T-notes (ZNZ23) today are down -6 ticks, and the 10-year T-note yield is up +3.4 bp at 4.337%.  T-notes are under pressure today as oil prices continue higher and put upward pressure on inflation expectations.  Also, the Fed may be forced to hold interest rates higher-for-longer if gasoline prices continue to rise and push the inflation statistics higher.  The 10-year breakeven inflation expectations rate today is up +0.8 bp at 2.370%. T-notes received support today from the weak U.S. housing starts report, which suggested that high mortgage rates are curbing homebuilder plans to build new houses.

The dollar index (DXY00) today is down -0.13% despite expectations for a hawkish FOMC meeting this week and today’s rise in U.S. T-note yields.  Meanwhile, EUR/USD (^EURUSD) is down -0.06%, and USD/JPY (^USDJPY) is up +0.10%.  The euro was slightly undercut by today’s small downward revision in the Eurozone CPI, which was dovish for ECB policy.  The Japanese markets are looking forward to the Bank of Japan’s policy meeting on Friday.

October gold (GCV3) today is down -0.7 (-0.04%), and Dec silver (SIZ23) is down -0.093 (-0.40%).  Precious metals prices are being undercut by today’s rise in the 10-year T-note yield, but have support from the slightly lower dollar and safe-haven demand sparked by weak stocks.  Silver was undercut by today’s weak U.S. housing starts report.  Gold continues to be pressured by the liquidation pressures after long gold holdings in ETFs fell to a 3-1/2 year low on Monday.

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